Tuesday, February 28, 2012

Housing prices were still weak late last year

By these two measures, housing prices were still weakening in the fourth quarter of last year (these indicators lag reality by at least several months). In real terms, the Case Shiller home price index is down 40% from its early 2006 high. This has been a really ugly housing market, no question. But that's what happens when the government goes all out to promote home ownership—subsidizing mortgage interest, directing Fannie and Freddie to buy mortgages made to people who couldn't afford traditional financing—and the Fed keeps real interest rates very low for years: prices rise to unaffordable heights, too many homes get built. Prices and new construction have to fall in order to clear the market.

Are they getting ready to plunge to new, disastrous lows, or are we close to a bottom in real estate? I've been thinking we're close enough to a bottom that it makes more sense to look ahead to improvement than to worry about further declines, and I continue to feel that way.


Benjamin Cole said...

Housing prices are already rising again in better markets.

However, the collapse in housing prices was mirrored by an equal collapse in commercial property prices.

Ergo, it is more likely that the real estate bust was caused by the Fed. The Fed tightened in 2008 in response to rising global gold, oil and commodities prices.

The result was a torpedo into the USA economy from which we have not still yet recovered, although global commodities prices have rebounded. I hope lesson learned. We managed to tank much of the Western economies in the process.

That said, I wish for a phase-out of Fannie and Freddie and VA lending--but a very bullish and aggressive Fed, focused on USA growth. The dithering, directionless Fed is a manage to USA prosperity and true security.

Unknown said...

You are ignoring a massive amount of supply that still needs to be dealt with. 6M plus homes in the foreclosure process, 14M homes plus underwater. Demand is destroyed - there is no move-up buyer market as move-up equity has been destroyed. There is no first time buyer market as there are no savings, no job growth and stagnant real incomes for those few with jobs. Prices still have a ways to drop. Don't kid yourselves.

brodero said...

My model has the Case Shiller 20 undervalued by 4%. This undervaluation will likely continue
for 2 more years and some time in the next 3 to 5 years reach fair value. Here is a hint this is partly based
on income growth .

Benjamin Cole said...

DJIA closes over 13k, up from 8k when Bush jr. left office.

Up 60 percent in Obama's time. Proof that all we need is a seriously mediocre president and Fed and the economy will expand.

It takes sheer boobery to drive this economy and DJIA down.

sgt.red.blue.red said...

Benjamim said ..."Ergo, it is more likely that the real estate bust was caused by the Fed. The Fed tightened in 2008 in response to rising global gold, oil and commodities prices."

The statement the Fed tightened in 2008 is false.

The Fed raised rates from mid 2004 through mid 2006.

Changes To The Fed Funds And Discount Rates